Diageo in $1.9 billion bid to raise stake in India's United Spirits

MUMBAI Tue Apr 15, 2014 2:05am EDT

A man walks past a building in the Diageo Shieldhall facility near Glasgow, Scotland August 26, 2010. REUTERS/David Moir

A man walks past a building in the Diageo Shieldhall facility near Glasgow, Scotland August 26, 2010.

Credit: Reuters/David Moir

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MUMBAI (Reuters) - London-based Diageo Plc (DGE.L) on Tuesday relaunched a bid to increase its stake in India's United Spirits Ltd (UNSP.NS), making a $1.9 billion bet on rising incomes in a country where consumption of alcohol remains relatively low.

The world's largest spirits maker, which holds 28.8 percent of United Spirits and has management control, offered to buy shares at 3,030 rupees ($50.30), a premium of 18.5 percent to their last closing price, sending the stock up by about 10 percent.

If successful, Diageo would end up with 54.8 percent of India's largest spirits maker, which was previously controlled by tycoon Vijay Mallya, who has shed assets under heavy debt and the collapse of his Kingfisher Airlines Ltd (KING.NS).

He remains chairman of United Spirits.

Last year, Diageo completed the purchase of its existing stake in United Spirits, settling with considerably less than it had sought after a 2012 tender offer failed when it opted not to lift its offer price despite a surge in United Sprits shares.

"We do think that it will be a successful transaction," Deirdre Mahlan, chief financial officer of Diageo, told Reuters on Tuesday.

"This price is also at an attractive premium to the market price and we believe that it creates a unique opportunity for investors to be able to monetize their investments."

Two-thirds of Indians do not drink alcohol at all, often for religious or cultural reasons, but rapid urbanization, a young population and a fast-growing middle class are changing consumption habits.

Alcoholic beverage sales in Asia's third-largest economy are forecast by Euromonitor to rise up to 8 percent a year by volume through 2017.

Despite an Indian economy growing at its slowest in a decade, global companies have continued to invest in the long-term potential of consumer spending in the country. Last week, UK telecoms giant Vodafone Group Plc (VOD.L) bought the remaining 11 percent in its Indian unit.

Diageo, the maker of Johnnie Walker Scotch and Smirnoff vodka, controls United Spirits through its holding and a shareholder agreement, and the tender offer is unlikely to result in any management changes, Mahlan said.

If fully subscribed, the offer would be at a 38 times multiple of United Spirits' consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) for the year ended March 2013 and the investment would lift Diageo's earnings on a per-share basis in the year ending June 30, 2016.

Diageo intends to keep United Spirits listed in India even if its offer is successful. The new offer will be launched in June, the statement said.

Mallya's UB Group owned 10.46 percent of United Spirits at the end of December. A spokesman for the group declined to comment.

JM Financial Ltd (JMSH.NS) and HSBC Holdings (HSBA.L) are arranging the Diageo offer. ($1 = 60.2350 Indian Rupees)

(Editing by Tony Munroe and Stephen Coates)

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